Date Added: Jul 2009
When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper the authors illustrate two useful variations to the standard mechanism for choosing forecasts, namely: combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. They illustrate these points using the Standard and Poor's 500 Composite Index.